The Chinese yuan, also known as the renminbi, is already convertible under the current account - the broadest measure of trade in goods and services. However, the capital account, which covers portfolio investment and borrowing, is still closely managed by Beijing because of worries about abrupt capital flows.
Earnings tipped to rebound for China Southern
China Southern Airlines, the largest mainland airline in terms of passenger numbers, is expected to reveal an annual profit turnaround this week after registering its worst-ever annual loss in 2008.
The profit, however, is still mainly powered by government aid, and the underlying business remains under pressure from low air fares.
Analysts polled by Bloomberg forecast that the Guangzhou-based carrier will post a net profit of between 23 million yuan (HK$26 million) and 607 million yuan for 2009, after posting a 4.8 billion yuan loss a year earlier. They say the result will reflects a rise in traffic, which hit a low in the last quarter of 2008, when the global financial crisis and economic slump hit the airline sector.
The central government subsidised mainland carriers last year to offset a fall in passenger fuel surcharges and soften the impact of the economic downturn. China Southern received 1.57 billion yuan in government grants last year, including refunds to its infrastructure development fund from the Civil Aviation Administration of China.
Beijing also injected 1.5 billion yuan into China Southern as part of a bigger 10.75 billion yuan fund-raising plan by the carrier, which issued new A and H shares to 10 investors, including parent China Southern Air Holdings, in March.
The outlook for China Southern and other mainland carriers this year will hinge on yuan appreciation, analysts say.
Exchange rate gains, which are computed on the reduction in the carrier's US dollar-based debt caused by gains in the yuan, used to be the major profit driver for China Eastern Airlines and China Southern, which are both debt-laden. However, the yuan barely appreciated last year, because of stringent controls by the government.
Nomura Securities estimates that China Southern will book 253 million yuan in exchange gains for every 1 per cent rise in the yuan this year, which translates to an 8.2 per cent rise in net profit. Expectations of a rise in the yuan have grown after an unexpected meeting between US Treasury Secretary Timothy Geithner and Vice-Premier Wang Qishan last week.
The brokerage house suggests that the yuan will rise more than 5 per cent this year, while Citigroup expects a 3 per cent gain.
Nomura also expects 241 million yuan in exchange gains for China Eastern for every 1 per cent rise in the yuan, equivalent to a 13 per cent improvement in net profit. Air China is forecast to book 384 million yuan in exchange gains for every 1 per cent yuan appreciation, or an 8.4 per cent improvement in net profit.
Mainland carriers flew 17.8 per cent more passengers last year than in 2008. The recovery in demand gathered pace in the third quarter of last year, when consumer confidence continued to improve.
China Southern made a profit of 287 million yuan in the quarter, compared with 38 million yuan in the first two quarters, under mainland accounting standards.
China Southern flew 66.3 million passengers last year, up 13.8 per cent over 2008. Its cargo tonnage rose 3.3 per cent to 861,930 tonnes.